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Tuesday, May 12, 2015

The Miracle of May 12: Greece manages to make €757 million IMF payment (fish: right) while continuing to pay domestic salaries and pensions (loaves: left). Informed observers attribute it to the Salvation of Salonika. But for how much longer can the multitudes be fed?

The Greek game of turkey continues to astonish us. The Greek government authorized the transfer this morning of the €757 million it owes to the IMF, thus avoiding default, producing a Miracle of May 12 and continuing to defy worldwide expectations (including our own).

How, and especially, why, is it doing it? First, there is the Salvation of Salonika, where the mayor of Greece’s second largest city, Thessaloniki, alone among major Greece municipalities, transferred the city’s cash reserves to the Greek Central Bank:

Thessaloniki Mayor Yiannis Boutaris believes that the government’s behavior is “completely crazy” but he has nevertheless led the way among peers in transferring his municipality’s cash reserves to the Bank of Greece, where the government can use them for short-term borrowing.

“It is very important that we show this municipality understands what will happen to the country,” Boutaris told the municipal council on Tuesday ahead of a vote on the matter. “We are not doing the government a favor; we are supporting the country.”

However, Boutaris admitted that he does not see eye to eye with the coalition on the way it has handled negotiations with the institutions. “The government does not speak the same language as those it is negotiating with,” he told Kathimerini. “That is why they cannot understand each other.”

Second, in its obsession with providing “the institutions” (aka troika) with no pretext for throwing it out of the Eurozone as part of its larger game-of-turkey strategy, it apparently has been indulging in its own variety of turbo-austerity—temporarily boosting its fiscal surplus by delaying payments to suppliers and investment projects (see Peter Spiegel at FT.com and the Greek budget analysis by Silvia Merler at breugel).

Greek Finance Minister and media superstar Yanis Varoufakis, rebounding from his recent sidelining, reiterates that Greece, despite its financial difficulties, will not cross “red lines” regarding pension cuts and reforms to collective bargaining. Nevertheless, he freely admits that Greece is facing a liquidity crisis within “a couple of weeks.”

German Finance Minister Wolfgang Schäuble, for his part, has made a surprising counter in his game-of-turkey hand by now allowing for a Greek referendum to decide whether the country will remain in the Eurozone and accept further austerity and painful “structural reforms.” Recall that an attempt by then Prime Minister Papandreou in 2011 to hold a similar referendum was immediately torpedoed by explicit threats of French President Sarkozy and German Chancellor Merkel to summarily expel Greece from the Eurozone, and soon brought down his government. Peter Schwarz on the World Socialist Website characterized this incident as follows:

The way Papandreou was forced to retreat—and possibly to resign—has all the hallmarks of a political coup. It demonstrates that the austerity measures implemented by the European Union to save the euro and the banks are incompatible with democratic principles.

That Schäuble now displays such a conciliatory attitude to a Greek referendum may be indicative of just how far the Germans have come in their game of turkey. That is, they now want Greece out, but, like all other participants in this game, don’t want to have any egg left on their face afterwards. This is something for the Greek people themselves, since their government has been skillfully playing its hand in this game of turkey as a war of attrition by making Herculean efforts to avoid default while not betraying its electoral mandate.

We are both finance ministers and bear responsibility, and thus we work well together. The media first built Varoufakis up into a superstar and now they have been dressing him down. Each is as misplaced as the other.

Update 17:35 CET: Unfortunately, Max Weber’s Entzauberung der Welt (disenchantment of the world) once again seems to be triumphant in our enlightened age, relegating the Salvation of Salonika to the rubbish heap of religious myths. The Financial Times reports at 14:41 CET that Greece actually plundered its emergency account at the IMF (apparently with the latter’s connivance) to the tune of €650 million to meet today’s Miracle of May 12 repayment. According to the FT, “Without the additional cash the government would not have been able to repay the loan instalment and also disburse nearly €1bn on Wednesday to pay public sector salaries, another official said.”

Is there no solace left for the spiritually inclined in our disenchanted meltdown creation?

Of course this can only mean that the prophesized “Grexit, Graccident, Grone” moment looms even nearer when Greek salaries and pensions—the miracle of the loaves—also comes under threat of disenchantment before the end of the month. Or can there still be a Eurogroup epiphany?

Yesterday’s Financial Times brings us more astonishing updates on Greece’s game of musical turkey: “Greece overturns civil service reforms.” One of the notorious “structural reforms” that all previous governments had agreed upon with the hated “troika” was to slim down Greece’s notoriously overstaffed and highly inefficient state bureaucracy (a bureaucracy which, like Italy’s, may actually reduce economic growth by creating unnecessary layers of red tape to justify its own parasitic existence). Now the Syriza coalition wants to reinstate thousands of dismissed civil servants and public broadcasting employees (including the famous finance ministry cleaning staff):

The latest Greek law calls for the rehiring of about 13,000 civil servants whose jobs were cut in an overhaul of public administration agreed by with bailout lenders by the previous Greek government. It also eliminated annual evaluations for civil servants and promotions based on merit. …

Kyriakos Mitsotakis, who — as the previous government’s minister for administrative reform — implemented past cuts, said Syriza’s legislation marked a return to the clientelist practices of the past.

As someone sympathetic to Greece’s current plight and fully aware that mass dismissals and wage cuts during a recession may be self-defeating from both the perspectives of overall economic activity and state finances, this news still gives one as an economist pause for thought. For it reveals an underlying philosophical attitude widespread among many leftists that, via government employment and generous pensions, the welfare state simply creates the income that it can subsequently tax to finance these payments in the first place. After all, the economy is just a circular flow (your expenditures are my income), and thus a generous welfare state should be in a position to bootstrap its way to an economic pepetuum mobile. No actual production or exports necessary! I became painfully aware of this after attending a discussion with Katerina Notopoulou, a member of the Syriza central committee, at the Kreisky Forum recently in Vienna. There I heard the astonishing statement that the Greek government needs to pay higher pensions so that pensioners can pay taxes (to in turn finance their pensions). While Ms. Notopoulou is a psychologist actively and commendably involved in cooperative initiatives to help citizens denied health insurance, and not an economist, this really does smack of a utopian leftwing welfare state perpetuum mobile.

Now don’t get me wrong here. I am no Tea Party fanatic who thinks that all government activity is parasitic on the “real” economy and must be eliminated. It is clear that well-designed government regulation, “night watchman” functions (police, legal system) and the provision of public goods (education, R&D, health care…) are absolutely essential for the efficient running of a modern economy. Still, this perpetuum mobile perspective is very much at odds with what one can call the “biophysical” perspective on economics: that economic activity is really a one-way flow from nature, via the productive process employing human and machine labor, to economically valuable output and wastes. And that the monetary circular flow we observe is ultimately powered by this one-way flow just like a rotating water wheel is powered by the flow of its underlying stream. But self-powered closed-circuit water wheels, aka perpetual motion machines, I thought, are impossible, even in leftwing economics.

A rock-crushing mill illustrated by Georgius Agricola's De Re Metallica (1556). Water enters at the top and exits at the bottom, powering the overshot wheel where, in junction with human labor, it crushes valuable ore-bearing rocks for further processing. This is an irreversible process even if the wheel is in constant circular rotation. For a good animated illustration of a returning water wheel in which the water to pumped back to the top to start the process again, see the Science Museum’s Old Bess returning Watt engine. This is not a free lunch because the steam engine must irreversibly consume coal to pump the water back. Returning engines were used during the early Industrial Revolution because water wheels provided more uniform circular motion for factories than the first steam engines could provide.

Moreover, an open economy like Greece that needs to import most of its essential commodities like energy, automobiles (remember Gregorios Sachinidis’s Mercedes 240D!) and pharmaceuticals, can only pay for them by exporting something of value to foreigners like tourism or shipping services (Greece’s two biggest exports)—unless of course the hated “troika” suddenly becomes willing to write them a blank check into the indefinite future.

So, as much as I agree with Greek Finance Minister Yanis Varoufakis that Eurozone austerity policies towards Greece have proven self-defeating and need to be thoroughly rethought, left-wingers like many influential members of Syriza still need to get real. Greece, despite the most radical internal devaluation of any Eurozone country, has a major export problem and desperately needs to find ways of putting its population back into gainful employment besides featherbedding the public employment rolls and electoral pandering to pensioners. (I reserve judgment whether the restoration of public broadcasting in some form is justifiable.)

Wednesday, May 6, 2015

With the Greek debt negotiations moving into their final genuinely unavoidably ultimate showdown this week, the game has incremented to a new and unprecedented level. Having started as a game of chicken (irresponsible brinkmanship), it quickly moved to what I called a game of turkey (second round postmortem blame game). This week, however, it has bootstrapped itself to yet a higher level: a three-way round-robin between Greece, the Eurogroup, and the IMF reminiscent of the famous rock-paper-scissors game dear to both children and game theorists.

Has the Greek debt game evolved to the next level: rock-paper-scissors between Greece, the Eurogroup, and the IMF?

First, why do we think the game has moved into its ultimate round (after previously predicting April 9, wrongly, as the moment of truth)? On May 12 Greece is scheduled to repay SDR 600,737,500 (around €763 million) to the IMF (after repaying SDR 157,331,282 on May 1). Since the Greek government, after plundering the cash reserves of various central government agencies to meet its last April 9 repayment, is now attempting to force all municipalities to transfer their cash balances to the Greek Central Bank, it must really be desperate and at its wit’s end (moreover, major cities like Athens have refused to comply).

But on Monday the Financial Times reported that the IMF is now insisting that any loosening of Greece’s primary surplus target (variously quoted as 3 or 4.5% depending on source and target year) be preceded by an explicit write off of Greece’s debt to be consistent with the IMF’s mandate to only bail out countries’ with sustainable sovereign debt loads.

Meanwhile, Pierre Moscovici, the European commissioner for economic affairs, according to yesterday’s FT, now says that any discussion of debt restructuring can only take place after a program of reforms is first agreed with Greece. And Greece, in turn, has all along claimed that any reforms (with or without red lines) cannot be agreed until the primary surplus target is relaxed. Voila: paper-rock-scissors, or a European Catch-22! How this even more intricate impasse can be resolved is now anyone’s guess.

About Me

I'm a research economist at UNU-MERIT (Maastricht, The Netherlands) and IIASA (Laxenburg, Austria) with a specialization in the economics of innovation, complex dynamics, economic growth and evolutionary economics. By the 2008 world crisis at the latest it became clear that macroeconomics, financial markets and economic policy cannot be entrusted anymore to mainstream economists. Hence this blog.